10 June 2015

As tensions rise again around the performance of senior officials of the Central Bank of Cyprus (CBC), it has been recommended once more that the institution should develop ‘Fit and Proper’ testing for its own directors and management.

The latest round of controversy involving senior officials at the CBC is being well-documented by the media in Cyprus. New revelations are almost a daily occurrence and the CBC is in the middle of its own serious crisis. The Governor herself is subject to judicial and Parliamentary inquiries into her conduct and it adds up to big questions about the fitness of CBC officials to serve. It echoes the damaging reports on the CBC made during and after the Cyprus banking collapse in 2012 and 2013 where the supervisor was shown to be inert and incapable in the face of the disintegration of the banking sector in Cyprus.

It is worth reminding ourselves of the fact that not a single member of the Board of Directors of the CBC has ever worked in a bank. Only one, George Syrichas, has even served as an employee in the CBC – and he is an economist. The Governor is a career-long civil servant rising to Auditor General before being appointed as CBC Governor, but there is no question that this was done on the basis of her having ever passed an banking exam or banking supervisory test.

Senior managers in the CBC are mostly accountants and though no doubt competent in their area none have worked in banks or appear to have passed any exams related to the operations of banks or the role of supervisory authorities. Many of these individuals were criticised by international bodies who investigated what went wrong during the Cyprus banking crisis. While there is no suggestion of malfeasance involving current CBC management there are plenty of references to there being a dearth of expertise.

This lack of knowledge of banking systems may have led these same senior officials to impose Resolution measures on FBME’s Cyprus branch last July, just two working days after the announcement by FinCEN of its Notices of Findings and Proposed Action. Resolution was the wrong approach and perhaps an illegal act, being designed for bankrupt banks not a healthy and liquid institution such as FBME.

A similar absence of understanding about the role of the CBC may have contributed to those same FinCEN Notices. Instead of acting to protect to a bank within its area of supervision, the CBC seems to have been encouraged in its attack. Instead of devising a joint approach with the superior authority of the Home Supervisor of FBME, the Bank of Tanzania, it ignored them and acted unilaterally. In fact, it acted with appalling bad manners and in contravention of all international standards.

And rather than follow the guidelines that have been laid down for central banks dealing with institutions in resolution by the Basel Committee on Banking Supervision and the European Central Bank, it ignored them. In fact, the senior CBC officials who dealt out the treatment to FBME’s Cyprus branch seemed to have been oblivious of their existence. As we know, those who acted – the Governor and her two Executive Directors (comprising the Resolution Committee), supported one assumes by the head of the Resolution Unit, Michalis Styllianou – did so without appearing to have consulted the Resolution Authority, the supreme body in such cases. So, apart from breaking international regulations they also broke their own rules in Cyprus.

As we know, the result of all these fumblings and bumblings could be that the Republic will have to meet compensation claims of many hundreds of millions of euros. What we don’t know – because of the complete lack of transparency associated with the acts of these senior officials – is why they did it and what they hoped to achieved. They haven’t talked about their motives, aside from some asinine comments about protecting depositors, the same they have seriously hurt, and of selling the branch, which they can’t do.

So if they don’t talk they allow other to speak for them, attracting the accusation of sinister motives to their actions.

It is time for Cyprus to think again about our earlier suggestion that senior CBC directors and officials are given the same sort of ‘Fit and Proper’ tests that are required to be passed by senior bankers on their appointment and promotion to new positions.

These tests should examine their knowledge of their jobs and of the wider issues of banking and finance, as well as checking standards of behaviour and outlook. The tests should be associated with attendance at mandatory courses and the passing of exams.

The disasters of recent years means the Republic can hardly do without adopting such an approach. The problem is that without higher standards and greater controls, the difficulties of the past will continually resurface. There should be no more political appointments in this vital area and a wholly serious new outlook be adopted to bringing in and promoting people to senior positions.

If bankers can be given ‘Fit and Proper’ tests so should central bankers.

As we said before, every director and senior manager of FBME Bank, the FBME branch in Cyprus and FBME Card Services have passed their respective ‘Fit and Proper’ tests.